Petroleo Brasileiro SA (NYSE ADR: PBR), the Brazilian national oil company better known as Petrobras, announced Wednesday that it had agreed to issue $42.5 billion in new stock to the Brazilian government to obtain the rights to five billion barrels of oil in offshore fields.
Petrobras will pay an average of $8.51 a barrel for the oil after almost two weeks of negotiations with the government, according to a regulatory filing. More than half the oil will come from the Franco field in the offshore Santos Basin, the company said.
Even though the company paid what is seen by many analysts as a premium for the rights, the deal is the linchpin for the Latin American oil giant's long-term financing plans.
Under its business plan, Petrobras needs to invest $224 billion by 2014 to develop its offshore fields and boost refinery capacity. The plan calls for issuing $25 billion in global shares as a crucial first step to meeting that goal.
Details of the $25 billion global issue are due to be released Friday, Petrobras said in its statement. The transaction with the government is set to take place on Sept. 30.
"Today Petrobras enters a new phase of stock performance where investors are going to focus more on the fundamentals of day-to-day performance than noise about the capitalization," Max Bueno, an analyst at Sao Paulo-based Spinelli Corretora, told Bloomberg News in a telephone interview. "I think the market was already factoring in the price that we know now."
The key to the deal was the estimated average price of a barrel of oil, which determined the size of the rights issue Petrobras would make to the government. Price negotiations between Petrobras and the government, which owns a controlling stake in the company, have held up the share issue, which was initially set for the end of June.
The value set for the reserves determines how much new stock Petrobras must offer minority investors in the public offering. Minority share holders will be forced to purchase shares of that offering or see their stakes diluted.
The company plans to issue enough shares to allow the government and minority investors to maintain their stakes. The sale was delayed as the company and the government awaited independent assessments on the value of the reserves.
The price exceeds the $7.50 per barrel estimated by most analysts, including Lilyanna Yang, an analyst at UBS AG (NYSE: UBS). But "that $8.50 per barrel "could still prove to be accretive," she wrote last week in a research note.
The price is "certainly at the high end" of what investors and analysts were expecting, Gianna Bern, president of Brookshire Advisory & Research Inc., based near Chicago told Bloomberg. "Market conditions right now are less than desirable, but Petrobras has a good long-term growth story."
Even though the deal came in at the high end of expectations and may add near-term pressure on the stock, the news prompted S&P Equity Research on Thursday to upgrade U.S.-listed shares of Petrobras to buy from hold.
Petrobras shares have plunged 26% in Sao Paulo this year on concern it would pay more for the oil than it's worth, diluting earnings.
Billionaire George Soros' Soros Fund Management LLC, which oversees $25 billion, sold its Petrobras stock in the second quarter, dumping its biggest company holding. BlackRock Inc. (NYSE: BLK), the world's biggest asset manager, and Banco BTG Pactual SA also sold Petrobras in the quarter, according to Bloomberg data.
The oil-for-stock swap is part of new regulations from President Luiz Inacio Lula da Silva late last year to increase government control over reserves after Petrobras discovered the Tupi field, the largest oil find since Mexico's Cantarell in 1976.
Lula received two separate independent valuations on the crude reserves on Aug. 19 from Petrobras and the ANP, the regulatory agency that oversees the oil, natural gas and biofuel industries in Brazil. The three began negotiations on Aug. 20.
The new deal guarantees Petrobras about 3.1 billion barrels in reserves from Franco, according to the company's statement, while the Iara and Florim fields will account for another 1.07 billion. Rio de Janeiro-based Petrobras will also receive the rights to oil at Tupi Northeast and Sul and Guara East fields.
News & Related Story Links:
Petrobras Gains to Two-Week High on $42.5 Billion Oil Swap Deal
- New York Times:
Petrobras Strikes $42.5 Billion Deal for Brazil Fields
Petrobras draws upgrade at S&P Equity Research